Hard To Find Value In Midcap Vaue Funds

I assess ETFs and mutual funds based on the quality of their holdings, first and foremost, because holdings determine the performance of the fund, not just the costs or the past performance of the fund. My predictive ratings are based on (1) the aggregated stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Costs matter because they can handicap performance of a fund, but the quality of holdings is paramount because no matter how cheap the fund, the performance will be bad if the holdings are bad.

Investors should not buy any mid-cap value ETFs or mutual funds because none get an attractive-or-better rating. If you must have exposure to this style, you should buy a basket of attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Lear Corporation (LEA) is one of my favorite stocks held by mid-cap value ETFs and mutual funds and earns my very attractive rating. LEA grew its after-tax profits (NOPAT) by 14% in the last reported fiscal year. It has a top-quintile return on invested capital (ROIC) of 22% and rising economic earnings. Despite these impressive numbers, LEA is valued at only ~$53.40/share. This valuation gives it a price to economic book value ratio of 0.5, implying LEA’s NOPAT will permanently decline by half. Those low cash flow expectations offer attractive risk/reward for a company that has shown strong profit growth..

Principal Financial Group (PFG) is one of my least favorite stocks held by mid-cap value ETFs and mutual funds and earns my very dangerous rating. PFG has earned negative economic profits in every year since 2001, as far back as our model goes. In the last reported fiscal year its economic earnings were -$4.70/share, the lowest they have been since 2001. Despite these dismal numbers, PFG is valued at ~$31.10/share. This valuation implies NOPAT growth of 8% compounded annually for the next 19 years. Betting on such high, long-term growth for a company with no recent track record of economic profitabilitydoes not seem like smart risk/reward.

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